Question of the Month #4: Non-lawyer Ownership?

Is the prohibition against non-lawyers having an ownership interest in a law firm still a good idea?

No, because the prohibition impedes firms' ability to recruit talented business professionals who are increasingly necessary to address the complex business challenges firms are facing. (40%, 59 Votes)

7 Comments

Mark Logsdon
on September 2, 2017 at 3:32 pm

Perhaps I ought not to have done, but I assumed the outside ownership in the company would be of the same assort as the ownership structure already in place. Not Amazon, for instance (I don’t imagine we are talking about taking law forms public), but rather more , Ms. A B, Chartered Accountant, or Mr. C D, Ph.D. in computer science. Perhaps someone who worried about conflicts of interest from non-lawyers could explain why there would be more or more difficult ones than already needed to be vetted with all lawyers in ownership positions at the firm.

Interesting that the idea that it might be in the clients’ interests to deregulate is not mentioned. That’s the standard rationale here in Blighty.

To my mind, the best case against non lawyer participation or ownership is bad business models create conflicts and other problems. Trouble is it turns out plenty of law firms have bad business models too. The benefits of experimenting with alternatives out weigh the risks, probably, but failure to look out for the real problems should also be anticipated if possible.

The concept that lawyers can only be acting in their clients best interests if they are only owned and managed by lawyers is tantamount to saying that they cannot be trusted to not be swayed by outside interests when providing advice in their sphere of excellence. Yet, we are saying accountancy firms, management consultants, etc., most certainly can. Of course, many lawyers may like the status quo, but the truth is, few clients do.

Very gratifying array of responses–each thoughtful and truly probing, yet coming at the issue from quite different perspectives.

In no particular order: Richard makes a salutary and often ignored point that it should be client-centric. Leon would seem to agree (the status quo is fine by lawyers, not so much by clients). And if you read Ron Friedmann’s more extended article/commentary (I highly recommend you do!), he also asks whether bar associations re-examining the policy should put lawyers’ or clients’ interests at the fore. To ask the question is to confirm the one and only possible answer.

I find it interesting that, as of this writing, the only “Yes” rationale that has gotten votes centers around avoiding conflicts of interest. Frankly, this has always struck me as the oddest of all the ideas floating around this debate. May we not stipulate that charging headlong into a conflict of interest (where, presumably, the pursuit of the almighty dollar at all costs wins out over professionalism) is one of the most self-destructive behaviors a law firm could engage in?

The analogs in the rest of the economy might be a hospital promoting profitable quackery, an airline skimping on maintenance at the cost of the odd crash or two, or a food/drug maker distributing knowingly adulterated products. When word gets out, as it inevitably will these days, I have two words for those companies: “Game over.” Surely the same would be true for a law firm embracing a clear (but lucrative) conflict. So if you presume a baseline level of sanity and desire for self-preservation on the part of those in charge, be they lawyers or business people, isn’t this an imaginary distraction?

I’d add that most partners act more like equity-vested employees who are interested more in secured short term employment (Annual Billables!) than actual owners who focus on long term firm growth and investment.

How many partners would promote actions that are good for the firm, but bad for their own personal practice? And yet, the best business owners do this all the time. (e.g. Closing underperforming legacy stores, planned obsolescence of successful legacy products. See GE Capital, as referenced on an earlier Adam Smith Esq post.)

This is already reality in Australia (not uniquely). The local view is that there is nothing in this model that prevents lawyers duties to the Courts (and administration of justice) and Clients being placed ahead of duties to shareholders.

As for the actual experience, well its mixed. On one hand, Slater & Gordon (a major plaintiff / labour side firm) has experienced the full cycle of partnership -> incorporation -> stock market listing -> exuberant use of capital to remunerate people, launch in the UK and buy new (unwise) “opportunities” -> financial collapse -> external insolvency administration -> ownership by private equity who acquired the debt -> cost cutting and staff departures (with many steps to follow). On the other hand we have a number of fairly successful IP firms utilising the model quite well.